A Battle for the 'Seoul' of South Korea's Economy

The bruising Apple-Samsung fight raises major intellectual property rights (IPR) issues that South Korea and Asian economies generally are ill-prepared for. Unless the concerns raised by the Samsung-Apple dispute are resolved, Korea should expect regular trade friction with major partners and frequent accusations of copying and cheating. As wealthy countries like Korea move away from manufacturing and further into services and information, the need for innovative Korean firms will only grow. Neither Korea’s corporate structure – dominated by mega-oligopolies with strong disincentives to innovate – nor education system – overwhelmed by rote learning and plagiarism – position Korea well for the future.

Korea’s traditional export strengths are in manufacturing – cars, ships, electronics, and heavy industries. These generate about 40% of GDP and much of Korea’s foreign exchange. However, unless Korea strengthens its service economy, it will increasingly compete ‘backward’ against the BRICS (Brazil, Russia, China, India, South Africa) over manufacturing, rather than ‘forward’ against the US, EU, and Japan over innovative services. The Korean business media generally ignore this to focus on chaebol—Korea’s large, international often family owned business conglomerates– but the costs of doing so are already apparent: Korea’s late arrival to smart phones (some five years after the U.S.) led directly to Samsung’s desperation and Apple’s retaliation in the courts.

Industrial skills diffuse easily. Just as Korean companies were able to attract American manufacturing jobs in the 1980s and 1990s, the BRICS and Southeast Asia now draw manufacturing jobs away from Korea. As South Korea grows richer, fewer Koreans are willing to work in a factory. Of the hundreds of Korean undergraduates I have taught, less than 5% tell me they expect to work in manufacturing. And Korea’s chaebol have scarcely invested locally in the last two decades; new capacity is built either closer to markets to prevent local protectionist backlashes (as in the U.S.), or elsewhere in Asia where labor costs are lower.

These trends are not uncommon. As globalization spreads, more and more people enter the global labor force, pushing down wages. Given that service jobs usually require more education than manufacturing ones, the latter more easily cede ground to foreign competition. The U.S. too had to shift, painfully, from an industrial economy manufacturing “stuff,” to a service economy producing useful information. Manufacturing now accounts for about 15% of the U.S. labor force. But American services – including education, research, film, music, video games, health care, banking, and software design – have become global leaders and, crucially, sit atop the value chain generating massive revenue through innovative “first movement” into new areas (tech giants like Google or Apple being obvious examples). By contrast, Korea’s biggest companies face competition from dozens of other firms (whether old rivals like Sony, or new ones from China) in well-established areas. These firms are successful, of course, but will not lead the future nor generate the long-term innovation Korea needs to fend off rising BRICS competition.